Surviving an I.R.S. audit - What Is an Acceptable Receipt for a Business Expense?

To prepare for my I.R.S. audit, I was required to bring A LOT of INFORMATION and DOCUMENTS. It filled an 11" x 12" accordion folder, all of the 12 slots were full. We were running out of room! 

Frankly, it was hard to tell if the DEMANDING, "business-like language" on the I.R.S. letters was a standard request or if I was in BIG TROUBLE!

I was petrified and had recurring nightmares about how I wasn't allowed to be an artist because I didn't follow the rules of the I.R.S.  The irony in the daylight never escaped me. I didn't become an artist because I was good at paperwork.

One of the many pages from the I.R.S. said:

 

Travel, Meals, and Entertainment
Verification of the number of nights away from home overnight for business purposes. Include receipt or credit card statements for meals and actual lodging. 

A log or diary for travel costs incurred while away from home on business.  This information should include transportation tickets, receipts, and canceled checks. Note: Canceled checks written to MasterCard, VISA, American Express, Discover, etc. are not sufficient to establish a business expense, even if they are business cards. You must keep the actual receipts or the monthly credit card statements showing each expense in detail.  (There was more, but I think you catch the drift.)

So, do you have a receipt for every expense on your business trips?

Do you keep a log or diary of your trips?

While I had a receipt for all my expenses, I didn't keep a log or diary for every trip in 2008, and there were quite a few business trips that year. Thank goodness, I have a great memory for small details which we wrote into the accounting records.

During the I.R.S. appointment, the topic of my business travel expenses was part of the "interview". Dressed to the nines in my business battle fatigues with an intimidation-proof vest (my best black suit with Harriete Estel Berman jewelry. of course), I was in hyper mode.  There was no doubt that we were prepared with itemized receipts for every expense. In addition, the expenses were color-coded and highlighted on the credit cards statements. This level of preparation and organization for the audit was deemed "adequate" by the auditor, but it took hours and hours to get ready.

From now on I am keeping a travel diary. I'm thinking a small notebook, with a pocket for my receipts will be more effective and a lot easier when I get home to write all the expenses into my CASH OUT Excell spreadsheet.

This low-tech solution is just the point. I believe that every artist should be able to deduct their legitimate business expenses without getting into trouble with the I.R.S. but you need to BE PREPARED with the required level of documentation.   

The next post will cover the key question from the I.R.S.about business travel? This is what I think they wanted to know all along....."Did I combine my business travel with leisure travel?"

Harriete

 

This post was updated on January 21, 2022.

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Hobby or Business? Criteria for the I.R.S.

Close-up view of The Nightmare by Henry Fuseli
Oil on canvas, 1210 x 1473 x 89 mm; Exhibited 1782
Lent by the Detroit Institute of Arts, Founders Society Purchase with funds from Mr. and Mrs. Bert L. Smokler and Mrs. Lawrence A. Fleischman